[Code of Federal Regulations] [Title 16, Volume 1] [Revised as of January 1, 2005] From the U.S. Government Printing Office via GPO Access [CITE: 16CFR436.2] [Page 444-446] TITLE 16--COMMERCIAL PRACTICES CHAPTER I--FEDERAL TRADE COMMISSION PART 436_DISCLOSURE REQUIREMENTS AND PROHIBITIONS CONCERNING FRANCHISING AND BUSINESS OPPORTUNITY VENTURES--Table of Contents Sec. 436.2 Definitions. As used in this part, the following definitions shall apply: (a) The term franchise means any continuing commercial relationship created by any arrangement or arrangements whereby: (1)(i)(A) a person (hereinafter ``franchisee'') offers, sells, or distributes to any person other than a ``franchisor'' (as hereinafter defined), goods, commodities, or services which are: (1) Identified by a trademark, service mark, trade name, advertising or other commercial symbol designating another person (hereinafter ``fran chisor''); or (2) Indirectly or directly required or advised to meet the quality standards prescribed by another person (hereinafter ``franchisor'') where the franchisee operates under a name using the trademark, service mark, trade name, advertising or other commercial symbol designating the franchisor; and (B)(1) The franchisor exerts or has authority to exert a significant degree of control over the franchisee's method of operation, including but not limited to, the franchisee's business organization, promotional activities, management, marketing plan or business affairs; or (2) The franchisor gives significant assistance to the franchisee in the latter's method of operation, including, but not limited to, the franchisee's business organization, management, marketing plan, promotional activities, or business affairs; Provided, however, That assistance in the franchisee's promotional activities shall not, in the absence of assistance in other areas of the franchisee's method of operation, constitute significant assistance; or (ii)(A) A person (hereinafter ``franchisee'') offers, sells, or distributes to any person other than a ``franchisor'' (as hereinafter defined), goods, commodities, or services which are: (1) Supplied by another person (hereinafter ``franchisor''), or (2) Supplied by a third person (e.g., a supplier) with whom the franchisee is directly or indirectly required to do business by another person (hereinafter ``franchisor''); or (3) Supplied by a third person (e.g., a supplier) with whom the franchisee is directly or indirectly advised to do business by another person (hereinafter ``franchisor'') where such third person is affiliated with the franchisor; and (B) The franchisor: (1) Secures for the franchisee retail outlets or accounts for said goods, commodities, or services; or (2) Secures for the franchisee locations or sites for vending machines, rack displays, or any other product sales display used by the franchisee in the offering, sale, or distribution of said goods, commodities, or services; or (3) Provides to the franchisee the services of a person able to secure the retail outlets, accounts, sites or locations referred to in paragraphs (a)(1)(ii)(B) (1) and (2) of this section; and (2) The franchisee is required as a condition of obtaining or commencing the franchise operation to make a payment or a commitment to pay to the franchisor, or to a person affiliated with the franchisor. (3) Exemptions. The provisions of this part shall not apply to a franchise: (i) Which is a ``fractional franchise''; or (ii) Where pursuant to a lease, license, or similar agreement, a person offers, sells, or distributes goods, commodities, or services on or about premises occupied by a retailer-grantor primarily for the retailer-grantor's own merchandising activities, which goods, commodities, or services are not purchased from the retailer-grantor or persons whom the lessee is directly or indirectly (A) required to do business with by the retailer-grantor or (B) advised to do business with by the retailer-grantor where such person is affiliated with the retailer-grantor; or (iii) Where the total of the payments referred to in paragraph (a)(2) of this section made during a period from any time before to within 6 months after commencing operation of the franchisee's business, is less than $500; or (iv) Where there is no writing which evidences any material term or aspect of the relationship or arrangement. [[Page 445]] (4) Exclusions. The term franchise shall not be deemed to include any continuing commercial relationship created solely by: (i) The relationship between an employer and an employee, or among general business partners; or (ii) Membership in a bona fide ``cooperative association''; or (iii) An agreement for the use of a trademark, service mark, trade name, seal, advertising, or other commercial symbol designating a person who offers on a general basis, for a fee or otherwise, a bona fide service for the evaluation, testing, or certification of goods, commodities, or services; (iv) An agreement between a licensor and a single licensee to license a trademark, trade name, service mark, advertising or other commercial symbol where such license is the only one of its general nature and type to be granted by the licensor with respect to that trademark, trade name, service mark, advertising, or other commercial symbol. (5) Any relationship which is represented either orally or in writing to be a franchise (as defined in this paragraphs (a) (1) and (2) of this section) is subject to the requirements of this part. (b) The term person means any individual, group, association, limited or general partnership, corporation, or any other business entity. (c) The term franchisor means any person who participates in a franchise relationship as a franchisor, as denoted in paragraph (a) of this section. (d) The term franchisee means any person (1) who participates in a franchise relationship as a franchisee, as denoted in paragraph (a) of this section, or (2) to whom an interest in a franchise is sold. (e) The term prospective franchisee includes any person, including any representative, agent, or employee of that person, who approaches or is approached by a franchisor or franchise broker, or any representative, agent, or employee thereof, for the purpose of discussing the establishment, or possible establishment, of a franchise relationship involving such a person. (f) The term business day means any day other than Saturday, Sunday, or the following national holidays: New Year's Day, Washington's Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving, and Christmas. (g) The term time for making of disclosures means ten (10) business days prior to the earlier of (1) the execution by a prospective franchisee of any franchise agreement or any other agreement imposing a binding legal obligation on such prospective franchisee, about which the franchisor, franchise broker, or any agent, representative, or employee thereof, knows or should know, in connection with the sale or proposed sale of a franchise, or (2) the payment by a prospective franchisee, about which the franchisor, franchise broker, or any agent, representative, or employee thereof, knows or should know, of any consideration in connection with the sale or proposed sale of a franchise. (h) The term fractional franchise means any relationship, as denoted by paragraph (a) of this section, in which the person described therein as a franchisee, or any of the current directors or executive officers thereof, has been in the type of business represented by the franchise relationship for more than 2 years and the parties anticipated, or should have anticipated, at the time the agreement establishing the franchise relationship was reached, that the sales arising from the relationship would represent no more than 20 percent of the sales in dollar volume of the franchisee. (i) The term affiliated person means a person (as defined in paragraph (b) of this section): (1) Which directly or indirectly controls, is controlled by, or is under common control with, a franchisor; or (2) Which directly or indirectly owns, controls, or holds with power to vote, 10 percent or more of the outstanding voting securities of a franchisor; or (3) Which has, in common with a franchisor, one or more partners, officers, directors, trustees, branch managers, or other persons occupying similar status or performing similar functions. (j) The term franchise broker means any person other than a franchisor or a [[Page 446]] franchisee who sells, offers for sale, or arranges for the sale of a franchise. (k) The term sale of a franchise includes a contract or agreement whereby a person obtains a franchise or interest in a franchise for value by purchase, license, or otherwise. This term shall not be deemed to include the renewal or extension of an existing franchise where there is no interruption in the operation of the franchised business by the franchisee, unless the new contracts or agreements contain material changes from those in effect between the franchisor and franchisee prior thereto. (l) A cooperative association is either (1) an association of producers of agricultural products authorized by section 1 of the Capper-Volstead Act, 7 U.S.C. 291; or (2) an organization operated on a cooperative basis by and for independent retailers which wholesales goods or furnishes services primarily to its member-retailers. (m) The term fiscal year means the franchisor's fiscal year. (n) The terms material, material fact, and material change shall include any fact, circumstance, or set of conditions which has a substantial likelihood of influencing a reasonable franchisee or a reasonable prospective franchisee in the making of a significant decision relating to a named franchise business or which has any significant financial impact on a franchisee or prospective franchisee. (o) The term personal meeting means a face-to-face meeting between a franchisor or franchise broker (or any agent, representative, or employee thereof) and a prospective franchisee which is held for the purpose of discussing the sale or possible sale of a franchise.